Unemployment Low: Let the Good Times Roll?

Unemployment is at a 17-year low, reported at 4.1% for the month of December. While the pace of hiring slowed in December 2017, that is natural since we usually reach near maximum employment during the holiday season – before December 25th – and begin to taper off from there. But for now, all signs point towards the broader labor market maintaining the unprecedented momentum of 2017. The good times are surely rolling … aren’t they?

The reasons for this job growth are mixed, but the biggest, most important reason has been the unleashing of the “animal spirits” in the business community – optimism is driving job creation. That optimism has been the election of Donald Trump, or, the “Trump effect”: loosely described as the deregulation agenda, tax cuts and a pro-business environment coming from the government, in stark contrast to the previous administration.

The deregulation agenda includes lessening the amount of paperwork businesses need to comply with, expanding energy production, and eliminating obstacles to business formation and/or expansion. The Tax Reform Act lowers rates on both businesses and individuals, and has allowed for the repatriation of billions of dollars of overseas capital. The pro-business environment is the signal from the administration that the government is here to help, or stay out of the way, and let the marketplace and capitalism help serve the interests of the American people. It has been an unprecedented success so far.

I. Positive data supports employment growth:

Positive employment numbers are occurring across the board. Non-farm payrolls are up 2.1 million from the end of 2016. The unemployment rate is at 4.1%, the lowest since 2000. Black unemployment is at 6.8%, the lowest on record, ever. Hispanics are at a record low of 4.9% unemployment.

Industry data is equally impressive. Construction employment up 3.1% and business services are up 2.6%. Education, transportation, manufacturing, imports, exports, and the financial sector are all up over 2016 numbers.

Labor participation rate for 25-54-year-old demographic is the highest since 2010. The Labor Participation rate could be a damper on employment news (see below), but not in the prime working years, where it reached 81.9% for 2017. That is the highest since 2010, and the 5th highest on record. Some executives have been quoted as saying that they are “over-hiring,” since once they hire a new employee, that employee may already have secured another job somewhere else – before they even start work.

II. Not all the employment data is as rosy as it seems:

Wages are up … barely. Post-war economic recoveries have resulted in robust 2.5% or higher wage growth. That has not been the case since 2010. This recovery has resulted in sub-2% wage growth, and 2017 was no different, clocking in at 1.4%. Strong employment numbers should see an increase in wages, as a growing business competes for limited labor availability. It remains to be seen whether a traditional uptick in wages will occur in 2018.

Labor Participation rate (LPR) remains surprisingly low. Despite an economy growing at a plus-3% rate, LPR is stubbornly low, checking in last month at 62.7%. So, while it is surging upwards for the prime working years of 25-54, overall it is not enjoying the same positive reports. Even while mired in the deep recession of 1980-81, labor participation remained overall at 64%. It reached its highwater mark in the mid-to-late 90s, cresting above 67% in 1996 and remaining there until the early 2000s. It settled around the 66% range in the middle of the 2000s and stayed there until 2008 when it began a long, steep decline. Checking in at 62.3% in 2015, it has stabilized and remained in that range since. While retiring baby boomers can impact that number, the greatest impact was, of course, the 2008 banking crisis, it was the steepness of the ‘08 crisis that makes retirement an unlikely cause for the LPR decline. Having other options, such as generous government assistance through welfare and disability, has done more damage to labor participation and “working” than anything else.

Industry data hides some market concerns. Commercial loan creation in the United States is virtually zero … non-shadow banking credit formation in China is near zero and could turn negative this year … auto loan default rates in the U.S. are higher than in 2008 … without credit creation, we will see marked declines in economic activity. How do we sustain the unprecedented “Trump effect” if bank lending for commercial projects is slowing globally? This is not a harbinger of doom, but a reminder that the data, however positive it may seem for the market and the economy, is not completely immune to negative effects.

The improvement in our employment numbers – combined with the rapid acceleration in GDP and other critical indicators – is the direct result of the conservative policy making of the new Administration. The “Trump effect” has been pro-growth and pro-business, and that has meant an improving labor market. But GDP performance and the market are always interrelated, even if there is a delay in their congruence. Bottom line, the good times may be rolling, but caution is always the prudent course in an ever-ascending marketplace.

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